This report describes a 1997 survey which examined performance funding in higher education and offers guidelines for states' and institutions' explorations of performance-based funding. Among highlights of the survey are: 32 states are planning or using performance measures in the state budget process; legislatively mandated initiatives are growing in number and scope; and most states report that it is too early to assess the impact of performance measures on institutional behavior. Advantages and areas of concern are also noted. Seven common processes in performance funding systems are identified: (1) determining the vision and overall purpose; (2) selecting goals and determining their relative weight; (3) adopting performance measures for institutional achievement of adopted goals; (4) collecting information about each measure; (5) allocating resources; (6) evaluating and adjusting the processes and goals; and (7) communicating performance results to various audiences. The report closes with 12 recommended principles in decisions about performance-based funding. These principles include: connecting performance funding with strategic planning, promoting collaboration, using existing data whenever possible, and using measures that reflect quality and customer focus rather than numeric counts. (An appendix compares the states on use of performance measures in the budgetary process.) (DB)